The S&P 500 index and its ETFs like SPY and VOO have bounced back in the past few weeks as investors buy the dip and bet that the worst is now behind us. After crashing to a low of $480 in April, the S&P 500 Index has jumped to $560, and is targeting the all-time high of $610. This article explains why one should not sell in May and go away, as the old saying suggests.
SPY ETF has numerous catalysts in May
Selling the S&P 500 Index in May and going away is risky because it has numerous catalysts that may push it higher this month.
The first catalyst comes from an unlikely source: the weak US economic data. Numbers released this week sent a red alert on the state of the American economy as Donald Trump’s trade war starts to bite.
It started on Tuesday when the US published weak consumer confidence report. According to the Conference Board, consumer confidence dropped to 87, the lowest level in years as many of them expressed worries about inflation and the labor market.
On the following day, the US published weak trade numbers that revealed that the trade deficit surged to a record high as companies rushed to buy ahead of tariffs.
Further data showed that the private sector added just 61,000 jobs in April, missing the expected figure by far. More numbers revealed that the economy contracted by 3% in the first quarter.
While these numbers were all bad, they are good news for the stock market as they will trigger a reaction from the Federal Reserve and Donald Trump. Historically, the Fed reacts to major black swan events by cutting interest rates and implementing quantitative easing (QE).
Therefore, the Fed will likely start pivoting in the coming months, which will boost the stock market.
Trump and China talks
The other reason not to sell the S&P 500 Index in May is that there are signs that the US and China will start negotiations on trade.
Donald Trump has signaled that he will be ready to talk with China. And the WSJ has reported that he will be ready to make his first offer of cutting his 145% tariff to 50% at the start of talks.
On Friday, Beijing also said that it was assessing the possibility of trade talks with the United States. Such a move would end the stalemate that has been there in the past 30 days.
While a deal will not come soon, signs of negotiations will be welcome by investors and push them higher in the coming months. An OCBC analyst warned that there will be volatility along the way, saying:
“The high level of reciprocal tariffs on China is not sustainable, so the market expects the US and China to start negotiating at some point. The beginning of negotiations will likely drive market volatility again because it is not expected to be plain sailing.”
S&P 500 Index technical analysis
The weekly chart shows that the S&P 500 Index bottomed at $482 in April, and has bounced back to $560. It has jumped above the 100-day Exponential Moving Average (EMA), while the Relative Strength Index (RSI) has pointed upwards.
Therefore, the index will likely continue rising this month. If this happens, the next point to watch will be at $610, the highest point earlier this year. A move above that level will point to more gains towards $700.
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